Chris Lau - Seeking Alpha

Sunday, September 13, 2009

Reflections from 1934 - 1 Year Anniversary

With 870 members now registered in the "Intelligent Investing" group on I created on kaChing, it is appropriate to compare a 1934 publication to events that have taken place currently.

In Security Analysis, written by Benjamin Graham, Graham wrote about the real estate mortgage-bond business between 1923 and 1929.

For owners of the first edition publication, this is on page 116. In regards to a bond offering, there was a statement of "appraised value" of the property:

"A typical building which cost $1,000,000, including liberal financing charges, would immediately be given and "appraised value" of $1,500,000. Hence a bond issue could be floated for almost the entire cost of the venture so that the builders or promoters retained the equity (i.e., the ownership) of the building, without a cent's investment, and in many cases with a goodly cash profit to boot. This whole scheme of real-estate financing was honeycombed with the most glaring weaknesses, and it is a sad commentary on the lack of principle, penetration, and ordinary common sense on the part of all parties concerned that it was permitted to reach such gigantic proportions before the inevitable collapse."

Caution Rosenberg is the former Chief Economist of Merrill Lynch. Now back in Toronto with Gluskin Sheff & Associates Inc., Rosenberg stated the following in his recent (September 11) newsletter:

One thing we do see is that the private client is taking the prudent approach towards risk. There have been $50 billion in net new cash flowing into equity mutual funds over the past four months. It is hard to believe that these flows can really push a $10 trillion market higher by 50%. But we do see that $130 billion of retail fund flows have gone into hybrids and bond funds — income is the key in a deflationary backdrop.

The market sentiment is obvious: investors are hungry for any asset class that generates returns greater than 0% (the approximate rate of government treasury bills e.g. yield on 1 month - 1 year t-bill is 0.13%-0.36%). This hunger is often accompanied by an appetite for greater risk as seen by rising stock prices.